Economics Ain’t Electricity

 

I was having a difficult time in a college physics course when we got to the ins and outs of how electricity works. Until then, all I understood about electricity was that if I wanted something to work, all I had to do was plug the cord in.

My roommate introduced me to the water analogy where I learned that water and electricity behaved pretty much the same way so long as I didn’t drop the radio into the bathtub. I won’t go into detail, but you can look it up.

In the 1980s, the Reagan administration tried to sell their tax cut bill by applying the same water analogy to economics when they introduced their “trickle-down theory.” They would enable the rich to get richer by giving them tax cuts, eliminating burdensome regulations that stifled business, and enacting legislation that would promote business and increase profits. In time, they said, this new wealth would—and here’s where the water analogy comes into play—trickle down to those at the bottom of the money chain.

There are several reasons why this analogy fails.

That small trickle begins as a tiny drop (consumer dollar) and combines with other tiny drops to become an exceptionally large body of water (Gross National Product). This remarkably large body of water then shrinks to but a trickle when water (money) is removed in abundance.

So, who takes it out?

This is where the second problem with the water analogy arises.

Imagine it is an extremely hot day, stifling hot if you are a poor worker in a construction crew or a migrant worker in a shade less strawberry field. Not so hot if you are a rich CEO in an air-conditioned office.

There is a glass of water and there are two people who want this glass of cool, cool water.

One is rich and powerful, and the other is not. I know what you’re thinking. Why would these two individuals even be in the same time zone much less close enough to be wanting the same contested glass of water? In the real world, they wouldn’t be, but fantasy is alive and well in the world of economics.

The rich and powerful individual doesn’t really need water but having it would be nice.

The not so rich and not so powerful individual really could use the glass of water because it’s hot out there.

Anyway, if the not so rich and virtually powerless individual were to receive the glass of precious water there is a good chance that he would share it because, in general, his group is more accustomed to sharing. They mostly have no choice and usually just want enough.

On the other hand, the rich and powerful usually want it all. An example of this is when in the 1980s the Hunt brothers, at the time three of the riches people in the world, tried to corner the silver market because, as any rich man will tell you, you can never have enough. Coincidently, you can never have enough is what the not so rich who just want enough will also tell you.

So, I think people can agree that the rich want it all. How else would millionaires become multi-millionaires and then billionaires and then multi-billionaires? For the last forty years, because the rich and powerful have friends in high places—put there with their money, these glasses of water have been going to the rich and powerful.

Let’s look at what happens to the water in that glass as it navigates its way down the money chain. Remember that in our analogy, water represents money. Where does that water go so that it might someday trickle into that stream where the not so rich and powerful individual might scoop out a measly handful to quench his thirst?

The rich man drinks the water and after his body has taken out all the good stuff, he pisses the bad water into his fancy toilet. He then flushes the toilet, sending that bad water into the sewage system where it meets up with other bad water and who knows what else. This now horrible water is treated at a water treatment plant and released back into the environment where it enters into the natural water cycle. It will eventually become part of the water supply that is purified and sent to a water tower and eventually delivered to our taps and into a glass where anyone might drink from it—assuming a rich and powerful person is not there to claim it first.

This process could take weeks, or it could take eons. The poor and powerless are used to waiting. What we know is that the trickle-down theory doesn’t hold water, at least not for those who aren’t rich and powerful.

But this is all theory. How has it worked out in the real world?

In 1950, after the Depression and World War, our economy was booming, and it was booming for everyone, workers and investors. The rich saw their tax rate decreased to 70% from a wartime high of 90%. They probably wanted more, but the middle class that this boom economy produced insured there would always be buyers for the goods they were producing.

There were roughly 17,000 millionaires in 1950 and two billionaires. By 1960, there were around 80,000 millionaires and the same two billionaires. The economy was working for everyone, but the rich thought they were getting the short end of the stick. They were still paying that 70% tax rate.

By 1980, the number of millionaires had grown to 500,000 and billionaires to thirteen. The middle class had also grown since the 1950s. But something happened when Reagan came into office. Air traffic controllers went on strike, and he used the opportunity to give the wealthy class what they thought was a well-deserved break. He fired the controllers and began working on legislation that would reroute money to the wealthy first, from where it would then trickle down to the working class.

In the next forty years, the number of millionaires would shoot up from 500,000 to 24 million, and the number of billionaires would go from 13 to over 900. The rich were getting richer rapidly while the poor and middle class became stagnant.

Of course, a million isn’t what it used to be.

What still is what it used to be is the minimum wage. In 1968 it was $1.60, or $14.42 in today’s economy, when taking inflation into account.

Today, it is $7.25, which obviously is $7.25 in today’s economy. So, worker’s wages have literally been cut in half while the number of billionaires has grown from 13 to 900.

I think it is safe to say that trickling down doesn’t work, neither theoretically nor realistically. The middle class that grew out of a government caring about workers is dying as government bends over backwards to give the rich even more money, because unfortunately, the water is drying up before the folks at the bottom ever get a drink.